I’m sensing a rise in a condition I haven’t seen for some time – new house buying fever.
The housing market is poised for what many may call a surprising move to the upside when it becomes obvious. Spoiler alert: a bullish move to the upside won’t be a surprise to anyone who knows what to look for. And right now, although it’s still early, and there are no guarantees, I’m seeing some very encouraging signs.
That’s because the doom and gloom in the housing market is getting worse by the month, and the darker the mainstream narrative becomes, the more the odds of a pleasant surprise increase.
In fact, I’m seeing movement on the part of both buyers and sellers, which suggests that the current drop in mortgage rates below 7% may be a catalyst for an increase in activity with bullish portents.
Don’t Trade Old Data
The latest new home sales numbers were once again below expectations and the gloom and doom crowd smiled. But, as I’ve said for quite a long time now, because of tight supplies and rising demand, it’s just a matter of time before homebuilder stocks once again move steadily higher.
The latest Census Bureau data reported 619,000 single family homes were sold in May, some 11% below the April number and 16% below May 2022. The median sales price was 417,400 but the average price was 520,000. The number of new homes for sale was 481,000, a 9.3 month supply.
Except for the elephant in the room - the May data reflects the highest mortgage rates in the past six months which led to a virtual standstill in the market. With mortgage rates dropping below 7% for the past four weeks, the odds of an improving climate are rising. Moreover, given the pessimism in the sector, when better numbers come out, the odds of a rise in the homebuilders are better than even.
Here’s more on how to sort through the data.
On the Ground – New House Buying Fever May be Stirring
I’m starting to see signs that “new house buying fever” is stirring. That’s the condition which affects people who need a place to live but don’t want to rent or get into the repairs and remodeling required by existing homes. Many of them are market timers.
How do I know? I’m seeing a moderate pickup in traffic for new homes in the upper middle markets. I base this on my usual “kick the tires” visual inspection of new home sites my neck of the woods, the Dallas-Fort Worth metroplex (DFW). In fact, over the past few days I’ve seen something I hadn’t seen in some time – several cars parked outside a group of recently built townhomes I’ve been keeping my eye on. That equates to people looking to potentially buy these homes. That was yesterday afternoon. This morning, I saw more activity in the area, as the builder has quietly cut the asking price while reducing the incentive.
In another one of my usual drive-byes, a subdivision which sold out in less than two years (during a period of rising interest rates) is now advertising “FINAL OPPORTUNITIES,” as they’ve run out of lots. Soon, I’ll have to find a new place to keep an eye on.
Meanwhile, new home supplies are being managed by the builders in order to maximize sales. Lennar is instituting a “just in time” strategy for its inventory in order to manage costs while making the most of its sales.
As a result, there just aren’t that many new developments moving forward – at least not at a rapid pace. That keeps supplies tight and works in favor of the homebuilders, who learned their lesson in 2008.
I am certainly keeping a close eye on one strategic location, which the builder has pretty much abandoned after installing the basic plumbing infrastructure more than a year ago. When that one starts breaking ground, I’ll let you know.
Complex Systems Adjust
If you haven’t figured it out yet, the market is adjusting. It is a subtle adjustment for sure. And it may be short lived if interest rates suddenly climb, as they well may if inflation data, such as the upcoming PCE number from the Federal Reserve – due out on 6/28 disappoints. For the record, the forecast is for a 2.8% year over year rise.
But here’s the thing. This adjustment is one that I’m noticing and which is potentially bullish, especially in the face of all the gloom and doom in the media, most of which is based on old data from May when mortgage rates zoomed higher. A lot has changed since then.
Currently, there are pockets of relative strength in the market, which cater to a high income, well positioned clientele. Meanwhile, builders have reduced the number of new projects, building just enough homes to meet or stay slightly ahead of potential buyers. Thus, demand remains high, in the face of tight supplies, even as an increase in existing home sellers is starting to appear.
But older homes, especially those in need of repair can’t compete with new homes. In addition, larger builders have much more leeway than small builders. For example, the development, described above, which is almost sold out is owned by a privately held, but nationally present builder with a massive balance sheet and market share to rival several of the publicly traded builders. Because of their deep pockets, these large builders can shift their incentives, marketing, and building activity rapidly according to demand and market changes, while keeping enough supply on hand to satisfy potential customers in the present.
The abandoned development with the plumbing infrastructure flapping in the wind is owned by a smaller, local builder. It’s more likely to struggle until the next huge upturn in the market. Even worse is the plight of the homeowner with a less than attractive home who wishes to sell in a tough market.
The sands are clearly shifting. The town homes I’ve been watching have cut their asking price, while reducing the builder’s incentives. I’m expecting a further increase in traffic.
What the Markets are Saying
Housing is all about location, interest rates, and more recently about market timing. For the past few months, I’ve been writing about higher sales materializing during periods of lower mortgage rates. And as the Mortgage chart, directly below shows, rates have broken below 7% for the past three weeks. The latest average is a tempting 6.87%.
The group of cars outside the townhomes, the “FINAL OPPORTUNITY” sign in the big development, and the increasing supply of homes for sale (Census data), and the quiet reduction of prices and incentives from builders suggest that the market timers are waking up and that the pent up demand is becoming visible.
The U.S. Ten Year Note yield (TNX), the benchmark for the average 30-year mortgage is holding steady, which is bullish for the housing market.
The iShares U.S. Construction ETF (ITB) is nearing an oversold level as its RSI is nearing 30. In conjunction with a nice triple VBP bar of support from $97 to $107, I expect this ETF is closer to bottom out than the mainstream expects.
Bottom Line
Sentiment on the housing market is sour as the media is focusing on old data from May. Mortgage rates have dropped since then.
However, the sands are shifting, quietly but decisively. Homebuilders are lowering prices and incentives, preserving their profit margins, but looking to increase sales even as they manage inventories.
The recent decline in mortgage rates is prompting market timers to move off the sidelines.
The take home message? The market is shifting, which raises the odds of a bullish summer surprise.
What could spoil the party? Anything that pushes mortgage rates back above 7%.
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